Do family ownership and control influence the consequences of IFRS adoption?

• Published date: 01 March 2024
• Author: Chloe Yu‐Hsuan Wu,Hwa‐Hsien Hsu,Che‐Hung Lin
• Date: 01 March 2024
• DOI: http://doi.org/10.1111/corg.12537

ORIGINAL ARTICLE

Do family ownership and control influence the consequences

of IFRS adoption?

Chloe Yu-Hsuan Wu

1

| Hwa-Hsien Hsu

2

| Che-Hung Lin

3

1

University of Leeds, Leeds, UK

2

Durham University, Durham, UK

3

Department of Accounting, National Pingtung

University (Pingshang Campus), Pingtung City,

Pingtung County, Taiwan

Correspondence

Che-Hung Lin, Department of Accounting,

National Pingtung University (Pingshang

Campus), No. 51, Minsheng E. Rd., Pingtung

City, Pingtung County 900392, Taiwan.

Email: chehunglin@mail.nptu.edu.tw

Funding information

The authors received no financial support for

the research, authorship, and/or publication of

this article.

Abstract

Research Question/Issue: This study investigates whether the impact of the manda-

tory adoption of the International Financial Reporting Standards (IFRS) on earnings

management practices varies between family and non-family firms. Specifically, we

examine the effects of different family ownership configurations and the CEO family

identity.

Research Findings/Insights: We find that firms in Taiwan use less accrual-based

earnings management (ABEM) under the IFRS but more real earnings management

(REM). On average, IFRS adoption is less likely to result in upward ABEM and REM in

family firms than in non-family firms. However, family firms with greater family own-

ership, lower family cash–vote divergence, a founder CEO, or a professional CEO are

more likely to promote the positive effect of the IFRS on ABEM and mitigate the

negative effect of the IFRS on REM. Furthermore, these firms are less likely to substi-

tute ABEM with REM after the transition to the IFRS.

Theoretical/Academic Implications: While recent literature has paid increasing atten-

tion to various governance characteristics that shape management's reporting incen-

tives and, thus, affect the consequences of mandatory IFRS adoption, we focus on

family firms in which the principal–principal agency relationship between controlling

owners and other shareholders is salient. We highlight the effect of family owners'

different agency features in relation to a structural change in the accounting regime.

Practitioner/Policy Implications: This study addresses how a firm's corporate gover-

nance influences the net benefits of implementing new accounting standards. Our

evidence offers insights to policymakers and capital market participants, showing that

variations in family owners' reporting incentives may have different impacts on the

consequences of adopting the IFRS.

KEYWORDS

corporate governance, earnings management, family CEOs, family ownership, IFRS

1|INTRODUCTION

The mandatory adoption of the International Financial Reporting

Standards (IFRS) in more than 120 countries is arguably the largest

change in standards in accounting history. Much literature has pointed

to a general improvement in financial reporting quality because the

implementation of the standards has enhanced the transparency and

comparability of accounting information (De George et al., 2016).

However, several studies have argued that the adoption of the IFRS is

effective only when managers have incentives to comply in substance

(Ball et al., 2003; Christensen et al., 2015; Soderstrom & Sun, 2007). A

recent stream of research has therefore started to investigate the

Received: 4 August 2021 Revised: 4 March 2023 Accepted: 3 May 2023

DOI: 10.1111/corg.12537

348 © 2023 John Wiley & Sons Ltd. Corp Govern Int Rev. 2024;32:348–371.wileyonlinelibrary.com/journal/corg

firm-specific factors that influence managers' increased commitment

to transparency through IFRS adoption (Christensen et al., 2015;

Daske et al., 2013; Voulgaris et al., 2015). Motivated by these studies,

this paper investigates the implications of financial reporting consider-

ations, which arise from the distinctive agency environment in family

firms, for their responses to mandatory IFRS adoption. Specifically, we

examine whether and when family firms are more or less likely to

engage in accrual and real earnings manipulations in response to IFRS

adoption.

Family firms are a unique organizational form (Anderson &

Reeb, 2003), in which controlling shareholders and top management

are often members of founding families. Family owners are long-term

investors, and there is strong interaction and integration between

family and business life in family firms. Given these ownership and

control features, compared to non-family firms, family firms have a

smaller agency conflict between managers and shareholders but a

greater agency conflict between large and minority shareholders. The

former leads to better incentive alignment, whereas the latter leads to

family entrenchment. Prior studies have suggested that the preva-

lence of these two agency effects has different impacts on financial

reporting decisions in family firms (S. Chen et al., 2008; Prencipe

et al., 2014; Wang, 2006). Accordingly, we argue that while family

firms face an exogenous shock to their financial reporting practices

when required to adopt the IFRS, their family owners' underlying

reporting incentives are likely to shape how the firms respond to the

change by adjusting their reporting practices.

In addition, the agency environment in family firms may provide a

differential set of reporting incentives with regard to earnings man-

agement under the IFRS. On the one hand, when the family alignment

effect prevails, family owners may view the transition to the IFRS as a

good opportunity to improve firm transparency for evaluative and

monitoring purposes by enhancing the reporting quality (Daske

et al., 2013). Given that family owners can benefit from the valuation

premium of their ownership in a more transparent information envi-

ronment (Anderson et al., 2009), they have strong motivation to inter-

nalize the benefits of the IFRS for improving firm value and, thus,

their family wealth.

On the other hand, when the family entrenchment effect prevails,

adopting the IFRS may create an opportunity for family owners to

manage earnings to freeze out minority shareholders, given the inher-

ent flexibility and discretion afforded to managers under the stan-

dards. In particular, the more transparent information environment

after adopting the IFRS may also prompt such owners to engage in

costly real earnings manipulations, which are more difficult to detect,

in order to maintain their private gains and control (see De George

et al., 2016).

Taiwan is an ideal setting for examining the effect of IFRS adop-

tion in family firms because of its predominance of family firms with

diverse ownership and control features (Claessens et al., 2000;

Claessens et al., 2002; Hsu et al., 2018) (Section 2.2 provides exten-

sive discussions of the institutional background relating to family firms

in Taiwan). When listed companies in Taiwan were required to comply

with the IFRS in 2013, there was no substantive concurrent change in

reporting enforcement. Hence, analyzing this single market allows us

to better isolate the effects of the change in standards on financial

reporting quality (Bruggemann et al., 2013). Because all listed compa-

nies adopted the IFRS simultaneously in Taiwan, self-selection at the

firm level due to the presence of voluntary adopters is not an issue

when studying the effect of the IFRS in this market. Taiwan's capital

market therefore provides a relatively natural setting in which to

investigate whether family owners' intrinsic reporting incentive plays

an important role in how effectively the new standards are adopted

and, thus, influences firms' financial reporting quality.

Our findings show that while mandatory IFRS adoption reduces

accrual-based earnings management (hereinafter referred to as

ABEM), firms are more likely to engage in real earnings management

(hereinafter referred to as REM), which suggests that the adoption

may unintentionally drive firms to use more REM as a substitute for

ABEM. The results indicate that, on average, the introduction of the

IFRS is less likely to result in an increase in both ABEM and REM in

family firms than in non-family firms. However, this effect is not

homogeneous among family firms. Following IFRS adoption, family

firms are less likely to engage in upward ABEM and REM when their

family owners have greater family ownership and lower excessive vot-

ing rights over cash flow rights. In addition, the implementation of the

IFRS is less likely to lead to aggressive ABEM and REM when family

firms are managed by a founder CEO or a professional CEO, but this

effect is not apparent in firms with a descendant CEO. Our findings

further reveal that the propensity to substitute ABEM with REM due

to IFRS adoption is less pronounced in family firms with greater family

ownership, lower family cash–vote divergence, and a founder CEO or

a professional CEO.

This study contributes to the literature in three major ways. First,

given the widespread presence of family firms worldwide, this

research extends the growing literature on how a firm's characteristics

shape its financial reporting quality in response to mandatory IFRS

adoption by focusing on family ownership and control characteristics

(e.g., Bruggemann et al., 2013; Cascino & Gassen, 2015; Daske

et al., 2013; Verriest et al., 2013; Wu & Zhang, 2019). In doing so, this

study sheds additional light on the importance of firms' reporting

incentives based on a context in which the principal–principal agency

relationship between controlling owners and other shareholders is

salient (Ball et al., 2003; Burgstahler et al., 2006).

Second, Prencipe et al. (2014) suggest that the literature on family

firms' accounting is still in its early stages. Previous research has

explored the relationships between family firms' corporate gover-

nance characteristics and earnings management (e.g., Achleitner

et al., 2014; Bonacchi et al., 2018; Wang, 2006). This study builds on

that literature by focusing on these relationships during periods of sig-

nificant change in the reporting environment. In particular, extant

research has not given enough consideration to how firms with vary-

ing agency environments conduct different opportunistic accounting

practices when they face uncertainties resulting from a substantial

change in the accounting regime associated with IFRS adoption

(De George et al., 2016). Our results imply that while the implementa-

tion of the IFRS per se is argued to have an impact on a firm's ABEM

WU ET AL.349